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Barely Hidden Threats. Part 1
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Barely Hidden Threats. Part 1

134

NEW YORK – December 4, 2018

The crisis in the US could erupt faster than expected, as indicated by an increasing number of indirect signs. At the same time, even such positive indicators as abnormally low unemployment actually mask the problems.

According to the forecasts of the largest American investment Bank Goldman Sachs, at the beginning of next year the US economy will face the consequences of recent market shocks, which could cost it 0.7% of the GDP. Analysts from Goldman Sachs believe that the fluctuations in the stock market of the last month are nothing more than a prelude to the coming crisis.

At the same time, the main locomotive pushing the US economy to the abyss is the Fed's policy. Meanwhile, it continues to repeat its mantra about the need to raise the key rate. And this is taking into account that American households continue to sink into a debt hole. Even the slightest increase in the rate will lead to households not being able to service their debts. Thus, the growth of the Fed's key rate has created the danger of a re-collapse of the real estate market.

Companies will also have a hard time. The period of low interest rates gave rise to a whole class of firms that can exist only at low rates and, accordingly, with cheap debt capital. The Fed's decisions knock the ground out from under the feet of such companies, and given that there are giants among them, they, falling, can take down the whole industry.

Not everything is in order in the banking sector: Despite the fact that most banks have passed the stress tests of the fed, the pressure on US bonds (and, as a result, the growth of their yield) creates problems with the banks' capital adequacy, as US Treasuries on the balance sheets of these banks become cheaper.

Large funds and institutions have already begun to react and reformat portfolios, returning to defensive assets, which has already led to sales in the technology sector, which we saw in November.

Even trends in the labour market indicate that not everything is calm in the US economy, despite abnormally low unemployment.

Housing costs are much higher than before the collapse

Barely Hidden Threats. Part 1

The median price of a new house (source: fred.stlouisfed.org)

Everyone remembers that at the end of 2008, amid the financial crisis, the Fed was forced to soften its monetary policy, setting a record low rate of 0-0.25% per annum, in order to somehow stimulate the economy. The rate was raised only at the end of 2015, and in 2017 the fed decided that the economy has finally recovered, the rate can be raised, and the faster the better. So, this year the rate was raised three times (last at the end of September) and the Fed left it at the level of 2-2.25% per annum.

The regulator is tightening the monetary policy to prevent inflation and the overheating of the US economy. The Fed expects that a further gradual rate increase will correspond to a steady growth of economic activity, maintaining stability in the labor market and approaching inflation to the target level of 2%, and the regulator assesses the existing risks as balanced.

But not everyone agrees. Donald Trump has repeatedly stated that he is "not happy" with the increase in interest rates. "I don't like it when we do so much for economic growth and then I see the rates go up," Trump said, which is quite understandable. In a few years of  near-zero rates, everybody got used to cheap loans, which now have risen sharply. This rise in price carries serious risks and, ironically, the real estate sector is once again one of the most vulnerable.

Single-family home sales also began to decline

Barely Hidden Threats. Part 1

Single-family home sales (source: fred.stlouisfed.org)

As noted in its analysis, the American real estate broker Redfin, more than a third of all housing, which was put up for sale in the US, in October this year was offered at a discount to the market of more than 1%. This is a record for the last eight years.

A year earlier, the share of "discount" houses was 6% less. Housing sales at Redfin fell 5.7% year-on-year in October, and the strongest falls in demand in expensive regions, for example in Seattle and San Diego, by 20 and 16% respectively. The shock in the real estate market is caused by the rate increase.

According to the US Association of Mortgage Banks (MBA), the 30-year mortgage rate jumped to 5.17% for the first time since April 2010. And this has seriously affected the demand. Analytical Agency CoreLogic indicates that in September alone sales in the primary and secondary markets of American real estate fell by 18% compared to September 2017.

A similar fall occurred in September 2007, before the crisis, when the real estate bubble burst. The US  mortgage crisis has led to the massive bankruptcy of the world's largest investment banks and insurance companies, such as the well-known Lehman Brothers, and has launched a global crisis.

And now the median price of a house in the US is much higher than the pre-crisis. And mortgages have become much more expensive.

Fewer Americans are working or actively looking for a job

Barely Hidden Threats. Part 1

Working or looking for a job population in % of working age (source:  fred.stlouisfed.org)

By the way, this time the mortgage crisis may hit US citizens, because Americans, who have traditionally been considered a mobile nation, have become less so in recent years. According to Attom Data Solutions, every third house sold from July to September (third quarter) was owned for 8.23 years, which is unusually long for the US.

It is worth noting that Donald Trump has previously requested from representatives of the real estate sector housing sales statistics. The results are not too pleasing —they build less, too. Investment in residential real estate for the three quarters of this year decreased by 0.6%. And this is a trend: Last year it fell 3.4%.

The decline in home sales, in turn, leads to the fall in sales of durable goods, such as furniture and household appliances: if no new home, then why a new refrigerator? These goods (durable goods) accounted for 9% of US GDP last year, and if we consider that investment in housing and private demand for it, according to the American National Association of House Builders (NAHB), is an average of 15-18% of GDP, we get almost a third of the US GDP. And if you remember that loans secured by real estate exceed a quarter of the assets of American banks, the picture becomes frightening.

Meanwhile, while ordinary Americans got used to cheap mortgages, large companies got used to living in debt.

Barely Hidden Threats. Part 1

Author: USA Really